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RESEARCH PRODUCT

A Problem of Optimization in a Case of Foreign Investment

Trinidad CasasúsJuan Carlos Pérez

subject

MicroeconomicsRational expectationsExchange rateOptimization problemRisk aversionmedia_common.quotation_subjectEconomicsVariance (accounting)Foreign direct investmentExpected utility hypothesisInterest ratemedia_common

description

The aim of the paper is to solve an optimization problem in an economic system with a central bank and a set of private agents. Each agent aims to maximize her expected utility, with rational expectations and being risk averse. The agents follow a profitability-risk criterium to face the portfolio diversification problem between foreign or domestic investment. An explicit formula for the optimal amount of foreign investment as a function of the expected exchange rate and an explicit formula for the exchange rate are obtained. These formulas show the hard influence of the expected exchange rate, the variance and the risk aversion on the agents’ decisions.

yearjournalcountryeditionlanguage
2000-01-01
https://doi.org/10.1007/978-3-642-57652-2_8